Fed changes the rules

The US dollar continues to be under pressure after, on Wednesday, the US Federal Reserve, through the mouth of J. Powell, announced that the rate for trust funds is at the optimum level. Growing demand for gold and other defensive assets indicates growing market doubts that the Fed will find grounds for raising rates this year amid growing recession threats in the coming year.

The outcome of the Fed meeting forces investors to rethink the logic that underlies the Fed's position. If earlier there was confidence in the markets that the Fed was guided by the Taylor formula for calculating the nominal interest rate, then now we have to admit that the Fed is guided by other logic, in which the markets have yet to figure it out.

The Taylor rule contains three key principles. First, the Fed should raise its target rate faster than inflation rises. Secondly, it is necessary to take into account the weakness of the economy, that is, to react to a decrease in output. And thirdly, the equilibrium interest rate should be constant and be at the level of 2%. That's just the third point and identified the problems that led to a change in the position of the Fed.

If we proceed from the principles laid down in the Taylor formula, then the target rate at the end of 2018 should be 4.75%, hence the market confidence for quite a long time that the rate will rise and the yield of dollar-denominated assets increase. Depending on the different behavior of inflation, the calculated level of the rate should go higher or lower, but in any case should be higher than the current level.

However, a problem emerged that Taylor could not have foreseen in his 1993. The demand for US Treasury securities, which underlie the calculation of the equilibrium interest rate, is decreasing, and the Fed can do nothing about it.

The reduction in the balance sheet, which was started by the Fed, on paper looked like a step that was calculated and had no alternative. The Fed pays a portion of its liabilities on a monthly basis without the usual reinvestment, while the rate on required reserves of commercial banks grows more slowly than the target rate. Kombank withdrawal of reserves from the Fed's accounts and move them to the domestic debt market, that is, buy part of the US debt instead of the Fed. A scenario close to the Japanese was conceived, where, as you know, the main holders of domestic debt are just commercial banks that have to constantly finance the government.

However, something went wrong. After the December meeting, the rate on required reserves of commercial banks was equal to the target rate, that is, banks no longer have any benefit to keep funds in the Fed's accounts. However, instead of buying government debt, commercial banks are beginning to look for profitability outside the United States.

This is the main reason for the change of position of the Fed. The balance goal will be revised because there is no certainty that there will be a sufficient number of investors able to buy US Treasury obligations, which means that the Fed will have to keep some part of the national debt on its balance sheet. In March, the Congress will begin to consider the issue of raising the national debt ceiling, and there must be confidence that there will be a buyer.

Now, players have only one opportunity to see an increase in yields on US securities, economic growth. Today, data on employment in January will be published, in case they turn out to be worse than expected, the dollar drops even lower, while gold remains the main favorite.

Eurozone

Almost all macroeconomic information coming from the eurozone indicates a growing risk of a slowdown. The European Commission confirmed the findings that economic activity is slowing down, consumer inflation in Germany in January is worse than forecast, retail sales fell below a two-year low, GDP growth rates in Q4. at 6-year lows.

The euro is declining after the speech by the head of the Bundesbank, Weidmann, who directly stated that the policy of normalizing the ECB is being postponed. EUR / USD is likely to end the week in the 1.1430 / 55 range, with bears having a slight advantage.

Great Britain

The clarification of the situation on Brexit and the lack of important data force the pound to go into the side range. Support for GBPU / SD 1.3052, resistance 1.3160, upward momentum is completed.